Accounting M&A deals are adding up

Firms hungry for growth gobble up others at fast
pace

Each time Allan D. Koltin asked for a show of hands, it reaffirmed what he'd already begun to see.
While presenting at a conference of the American Institute of Certified Public Accountants in January, Mr. Koltin asked the room of CEOs, who represented roughly 75 of the largest accounting firms in the country, three questions.
How many of you count mergers and acquisitions as part of your strategic growth plan? Almost every hand went up.
How many of you plan to consummate a deal in 2013 or 2014? Again, a near-unanimous show of hands.
How many of you are in talks with another Top 200 CPA firm, meaning those with revenues of $13 million or more? Two-thirds of the hands were raised.
“What that's telling me is mergers and acquisitions of the larger CPA firms (are) going to continue at the record pace they're at,” said Mr. Koltin, CEO of Koltin Consulting Group Inc., a Chicago-based consultant to many of the nation's Top 500 accounting firms.
Already, Mr. Koltin said, M&A activity has become “absolutely unprecedented.”
“And I think we're at just the tip of the iceberg,” he said.
Northeast Ohio firms are among those crunching numbers for deals that involve themselves.
“In the past five years, we are consistently having conversations with three to five strategic firms that are smaller than we are about the prospects of getting together, and we are consistently receiving inquiries from firms much larger than us who would see us as being a very strategic combination for them,” said Randy Myeroff, chairman and CEO of Cohen & Co., a Cleveland accounting firm with annual revenue of $34 million.
Just last week, Skoda Minotti in Mayfield Village announced its fourth acquisition of this year, double the number of deals it did in 2012. Chairman Greg Skoda anticipates the business advisory firm's revenues on an annualized basis will reach roughly $39 million by year-end 2013 — double what they were in 2010 or 2011.
“It's about as heated an acquisition market as it's ever been right now,” Mr. Skoda said. “The numbers of acquisitions that are being done around the country are significant, and firms are growing really rapidly.”
According to Accounting Today's 2013 list of the Top 100 firms, the 20th largest accounting firm in the country had annual revenue in 2012 of $185 million. That's double the $91.7 million in revenue reported by the 20th largest firm in the publication's 2003 list.
“There's a lot more larger firms, and in order for them to grow and keep pace and keep talent, you have to look to mergers,” Mr. Myeroff said. “You can't bring in that much revenue through organic growth.”

Grow or die

As is the case in many professions, merger deals are increasing because the age of baby boomer top executives is rising. Probably two out of three deals for accounting firms are driven by succession needs, Mr. Koltin said.
However, Mr. Koltin said he has noticed in 2013 “a clear change in why mergers are happening.”
“We're seeing mergers between firms where there is no succession planning issue or problem,” he said. “Rather, they're simply saying that bigger is better.”
Growth achieved through increasing revenues from existing operations will be limited, at best, to 3% to 5% a year for the foreseeable future, Mr. Koltin said. So, firms are turning to strategic acquisitions.
“In this business, if you don't grow, you die,” he said. “Top talent will only go to firms that are growing because growing firms have the ability to make new partners, and growing firms are typically more profitable.”
The Sept. 1 acquisition by Skoda Minotti of a forensic accounting firm reflects a growing desire among firms to offer specialized services.
“The companies today which are our clients and prospects are more complex than they used to be,” Mr. Skoda said. “In the "80s and the early "90s, if you're in the middle market, they predominantly did most of their business in Cleveland, Ohio. The services they needed were less complex than they are today.
“Today, if you're going to be a service provider that's going to help them build and grow their business as opposed to doing tax returns and financial statements ... you've got to have more expertise and you've got to have more resources to meet their needs,” he said. “If you're not in a position to provide services to those folks, you're going to lose clients.”

Hitting the road

Geographic expansion is another driver of mergers.
Skoda Minotti's recent deals for a trio of Tampa, Fla., firms and the scheduled opening of a new office there Nov. 1 mean the firm can serve its Florida clients from a Florida office, Mr. Skoda said.
The three acquisitions done by Solon-based SS&G Inc. in less than three years were motivated by the firm's desire to enter the Chicago market, where it is booking new clients and now employs 90 people, said Bob Littman, managing director and CEO. SS&G has its eyes on additional expansion in New England, the Southeast and the West Coast, he said.
Howard, Wershbale & Co., a firm based in Beachwood, expanded in Columbus through a 2010 merger and come Jan. 1 expects to close its merger with Deimling Forbes in Mentor to expand into Lake and Geauga counties, said Stephen E. Stanisa, president and CEO.
And Cohen & Co. is in talks with four firms, according to Mr. Myeroff — three local and one whose location he wouldn't divulge. Client loyalty, geographic positioning and “really significant expertise in a certain area” all are reasons for those conversations, he said. So is the need for talent.
“People in the Midwest are very loyal,” he said. “It's not that easy to get lateral hires. We rely on that (loyalty) on our end, and we face it on the other end. The answer is, you can't do it (recruit talent) fast enough.”
Local firms will continue to buy, sell and merge, anticipates James Sprague, a partner with Independence-based Walthall, Drake & Wallace LLP. It closed its most recent merger with Frank, Seringer & Chaney Inc. on Nov. 1, 2012, expanding into Amherst and Wooster.
“There are quite a few firms in the area who have really good folks running their businesses, but they're approaching that age when they want to slow down,” Mr. Sprague said. “There's a desire to cash out.”

The circle of life

Though M&A is up, the number of firms known to the American Institute of Certified Public Accountants has stayed pretty steady at 44,000 because for each deal done, there are professionals who splinter off and form sole proprietorships, according to Mark Koziel, the institute's vice president of firm services and global alliances.
Some peel off because they don't achieve the status at the combined firm they might have wanted, and others don't like the culture changes, Mr. Koziel said.
Most people in the field say the increased merger activity is positive for the profession and its clients because, as firms grow, so, too, do their capabilities and the opportunities for their employees. Mr. Koziel perceives the trend more neutrally.
“It's the circle of life, right?” he said. “I could show you the list of the Top 100 firms from 1974, and you wouldn't recognize the majority of names on that list. Every couple of decades or so, the profession goes through the cycle.”